Gold Standard Definition and the Gold Standard in U.S. History

What is the Gold Standard?

Over the course of human history, Gold has remained a medium of exchange longer than nearly any other form of currency. But in today’s modern world, you are much more likely to encounter government-issued paper money. To understand the connection between the two, we must define Gold standard.

Perhaps the simplest Gold standard definition is a system in which a currency’s value can be defined in terms of Gold and currency can be exchanged for Gold. Many also define Gold standard as a system in which a nation actively controls its money supply in order to maintain a set Gold price.

What is the Gold Standard’s Role in American History?

The United States’ complicated history with the Gold standard can be broken down into five periods. From 1792 to 1862, the dollar was backed by a bimetallic system of both Gold and Silver. This period was followed by a fiat monetary system until 1879. The nation held a full Gold standard from 1879 to 1933, when a partial Gold standard followed between until 1971. Finally, from 1971 to the present day, the United States again holds a fiat monetary standard.

Establishing the Bimetallic Monetary System (1792-1862)

With the ratification of the U.S. Constitution in 1788, Congress gained the authority to develop a national currency. The Coinage Act of 1792 not only established the U.S. Mint but also fixed the dollar to 24.75 grains of pure Gold and 371.25 grains of pure Silver. Congress instructed that the very first coins must include representations of both liberty and an eagle. Thus, the first Gold coins were minted in denominations of $10 Eagles, $5 Half Eagles and $2.50 Quarter Eagles. Silver coins followed in denominations of Silver dollars, half dollars and quarter dollars. Each coin contained its actual designated weight and value in Gold and Silver.

Global fluctuations in the supply of Gold and Silver applied significant pressure to this system. As an abundance of Silver mined from Central and South America flooded the market, coin traders began buying Gold coins with lower-valued Silver. Later, as Gold supplies increased globally with mining operations from California to Australia, coin traders purchased Silver coins with lower-priced Gold. Congress adjusted the official Gold and Silver value of the dollar multiple times during this period. However, adjustments often came too late, after traders had already profited from taking coins out of circulation.

Abandoning the Gold Standard to Finance the Civil War (1862-1879)

In desperate need of funding for the Civil War, Congress passed the Legal Tender Act in 1862. Paper currency was guaranteed only by the full faith and credit of the United States and could not be redeemed for Gold. During this time, the Union printed $450 million in paper currency and inflation rose by 80 percent. By the end of the Civil War, the national debt had reached $2.7 billion.

In response to hyperinflation, Congress moved to decrease the money supply by discontinuing the production of Silver dollars. Bank defaults and an economic depression ensued but the move successfully reined in inflation. With the hope of bringing renewed economic prosperity, public opinion swayed toward a return to the Gold standard. In 1875, Congress passed the Specie Payment Resumption Act, which ensured that by 1879, all paper currency could be redeemed for Gold.

Return of the Gold Standard and Creation of the Federal Reserve (1879-1933)

Deflation continued with distinct winners and losers across the United States. Bankers and those with significant savings, many of whom lived in the northeastern United States, benefited from increased economic stability. Gold redemption for paper currency meant their money and holdings grew in buying power. But for farmers and laborers, namely those in the southern and western United States, lower inflation meant lower wages. They were forced to lower the prices they charged for goods and services, and their debts became increasingly difficult to pay off. Farmers struggled to afford the mortgages on their land.

Those struggling under deflation and members of the populist Democratic Party grew in political power and called for an expansion of Silver currency, which would have increased inflation and provided immediate financial relief to many lower-income Americans. Meanwhile, Republicans promised strict adherence to a Gold standard as a mode of ensuring long-term economic growth and stability. Republican President William McKinley prevailed and further cemented the Gold standard by completely discontinuing the use of Silver as part of the dollar’s valuation.

The Gold standard further evolved with the creation of the Federal Reserve System in 1913. This allowed the Federal Reserve to print paper currency while maintaining that 40 percent of the currency’s value be reserved in Gold. While this temporarily strengthened the nation’s financial system, it could not protect against the Stock Market Crash of 1929 and Great Depression that followed.

FDR’s Move Away From the Gold Standard and the Bretton Woods system (1933-1971)

In 1933, President Franklin D. Roosevelt used executive authority to make it illegal for citizens to privately hold Gold outside of jewelry. All Gold coins and bullion were ordered to be turned into the government for compensation at $20.67 per ounce. By 1934, a new Gold price of $35 per ounce was set and guaranteed indefinitely. Private citizens could no longer redeem paper currency for Gold. Buying Gold for investment purposes was forbidden. It could only be used in transactions with foreign governments. A national stockpile of Gold would eventually be stored at Fort Knox in Kentucky.

The Federal Reserve was mandated to maintain stability according to the set Gold price. During this time, American paper currency provided a reliable standard for international trade and investment. In 1944, President Roosevelt worked with leaders across the globe to create the Bretton Woods system in which nations agreed to restrict inflation to no more than 1 percent. The Gold price remained set at $35 per ounce in the United States until 1971.

Adoption of a Fiat Monetary System (1971-Present Day)

In 1971, as the Gold stockpile at Fort Knox dwindled due to international transactions, President Richard Nixon announced that foreign countries could no longer redeem dollars for Gold. Moving forward, paper currency was ensured only by the full faith and credit of the United States and a fully fiat monetary system was adopted.

Demand for federal funds led to double-digit inflation into the 1980s. Some recommended a return to the Gold standard to rein in inflation. The Federal Reserve, however, gained support from President Ronald Reagan in its efforts to reduce the money supply and thereby reduce inflation without being restrained by the Gold price.

In 1985, the U.S. Treasury began selling Gold coins to the public for the first time in more than 50 years. The U.S. Mint currently plays an active role in contributing to the Gold supply available to collectors and investors. The global Gold trade, as well as the number of international mints and dealers, has flourished in recent years. Buying Gold in the United States has become a simple commercialized process.

Calls for a Return to the Gold Standard, How to Define Gold Standard in the Modern World

As of 2013, no countries in the world are known to hold to a Gold standard. Returning to a Gold standard in the United States, however, is a frequent topic of political debate, even as experts struggle to define Gold standard in the modern world.

The main argument in support of returning to a Gold standard is its potential to tamp down inflation. This is because the money supply would be restricted by a largely static global Gold supply. Adopting the Gold standard would likely reduce government spending and debt because the government would not have the ability to simply print more money to fund its actions. Some experts believe this would drastically reduce needless spending in all areas of the government, ranging from the military to social programs. They also believe this would ensure balanced budgets, promote saving among American citizens and set the stage for long-term economic growth and prosperity.

Despite its potential benefits, advocates have struggled to agree on a feasible plan for returning to the Gold standard; nor have they determined a consistent Gold standard definition. Some define Gold standard as a system where Gold prices are allowed to fluctuate according to the open market. Others believe Gold prices would need to be set artificially low or artificially high by the Federal Reserve in order for the Gold standard to be re-adopted nationally. In today’s global economy, adoption of the Gold standard would require cooperation not only from all sectors of government, but also both political parties and a number of international governments.

Many criticize the Gold standard because it does not empower the Federal Reserve to easily increase the money supply during recessions, times of war or other emergency situations. For this reason, the Gold standard is often deemed outdated and inflexible when compared to a sophisticated technologically-advanced and research-based Federal Reserve. The Federal Reserve, for example, is largely credited with leading recovery efforts and restoring the country to low unemployment following the Great Recession beginning in 2007. Some experts also believe the Gold supply and Gold price are not as stable and reliable as some profess them to be. For example, the Gold price currently fluctuates on a daily basis and has increased dramatically in recent years, notably during the Great Recession. Opponents also point to historical examples of how the Gold standard did not guard against the Great Depression or a number of bank failures.

Sources: Atack, Jeremy, Peter Passell, and Susan Lee. A New Economic View of American History: From Colonial Times to 1940. New York: Norton, 1994. Print.